AMD Outlines Restructuring Plan After Loss

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Advanced Micro Devices reported dramatic losses in first quarter revenues, which executives called unacceptable. AMD also delivered a rough draft of a restructuring plan that will return the company to its former status, executives said.

AMD recorded operating and net losses of $504 and $611 million, respectively, or $1.11 per share. AMD recorded revenue of $1.23 billion, down 30 percent from the fourth quarter and 7 percent from a year ago.

That larger-than-expected loss was the topic of a conference call Thursday afternoon where Dirk Meyer, president and chief executive of AMD, said that AMD would be undertaking some major restructuring efforts to deal with what he described as “an increasingly complex CPU business.”

“After 14 consecutive quarters of gaining share in the CPU business, the first quarter was a major setback in the strategic transformation of our company,” Meyer said during the call. “But we know, the only way to get healthy is to fully understand our problems and fix them.”

Those problems, according to Meyer, had mainly to do with “growing pains,” pricing pressures, and some “mix and delivery issues.” During the call, he said that with AMD’s past success has come increasing complexity in the form of more customers, more channels, and more businesses.

“The game is really quite different,” Meyer said, “and frankly, that complexity is has led to some challenges for us.”

“Starting roughly in the middle of last year, we suffered occasional mix and delivery issues in the course of serving new and expanding relationships with global OEMs,” Meyer when on. “This led to challenges in our properly serving our distribution channel. Second, the pricing pressure that began in Q2 last year, continued in the mainstream of our CPU business as our competitor did everything in its power to protect their monopoly. Third, we saw an increasingly competitive product environment in both CPUs and GPUs. And finally, weakening demand in the consumer electronics businesses added to our pain.”

While any one of these problems might have put a damper on AMD’s first-quarter performance, Meyer said the sum total of all four was something of a perfect storm for the company.

“They really went out and took too much share too quickly – they tried to get too big too fast,” analyst Doug Freedman of American Technology Research said recently. “If you look at other major share battles – like Toyota’s market share in the U.S. – most companies take it very slowly. They [Toyota] took 10 years to double their share. If AMD had taken the same approach, they might be in a very different position today.”

The restructuring plan

Chief executive Hector Ruiz announced the formation of an executive task force that will oversee the company’s restructuring efforts during the forthcoming year. The company has a challenge on its hands, he said but the potential upside is also dramatic.

“I expect this transformation to be bigger and more dramatic in impact than the one we undertook in 2002,” Ruiz said.

“I want you to know that this quarter was more than a miss, more than a series of concurring issues or challenges—this quarter was a major inflection point in our timing of action plans to continue to innovate effectively on behalf of our customers,” Ruiz added.

So how is AMD planning to get back on its feet, especially after rival Intel just posted $1.6 billion in net income?

According to the company’s executives, the plan is fairly straightforward. “We need to grow the top line, change our cost structure in line with the competitive environment, and execute flawlessly on our product and technology roadmaps,” Meyer said.

In order to do that, AMD will be accelerating some of its initiatives, including simplifying its sales and marketing organization in order to improve its responsiveness to customer demand, restore its value proposition in the channel and refocusing marketing spending on demand generation programs, and also increase its emphasis on acquiring new customers and broadening our portfolio with existing customers.

Meyer also said that while the company knows it can’t cut its way to prosperity, there will need to be “some significant adjustments to its business model” – in other words, layoffs.

In addition to reducing discretionary expenses by over 100 million annually, Meyer said that the company plans to leave the year with a lower head count than it has today. When pressed, he did not give specific numbers.

In terms of AMD’s Q2 outlook, Bob Rivet, AMD’s chief financial officer, said the company expects revenue to be flat to slightly up.

“After more than three years of successfully executing our customer expansion strategy and significantly growing our unit and revenue base, our first quarter performance is disappointing and unacceptable,” Rivet added. “We are aggressively addressing the issues that led to our significant revenue decline. We are aligning our business model, capital expenditures and cost structure with the goal of accelerating our return to profitability.”

It was a terrible start to the year, Rivet admitted, but the company is confident that it has a plan to put itself back on the right track, he said.

Hector Ruiz, chairman and chief executive officer of AMD, concluded the call by putting the company’s current financial woes it in a much larger context. He added that AMD’s recent failings and misjudgments have only served to accelerate the company’s efforts to get back on track.

“Four years ago, we had one product in the company that, through tweaking and maneuvering, we could actually make it serve various segments of the market,” Ruiz said. “Today, we’ve proliferated our product line. Now, we’re serving segments in the industry where each of the segments are large in size,” Ruiz said.

This will require separate business models to address each segment, something the company has not done in the past, Ruiz said. “Today, up till now, we’ve been running the company well—as a matter of fact in the end of last year, [we had a] 26 percent share in units as a result of a fairly successful four year run that we had in doing it that way,” he said.

“But know, as Dirk [Meyer] outlined, we increase the complexity of going from a largely channel company to now one with a very heavy weighting towards OEMs, and a complexity of products—we have to restructure how we address that,” Ruiz added. “The way we manage the accounts is going to be different. As a matter of fact, over the next few weeks, we will be internally announcing those changes, which will all be aimed at managing more effectively this much more complex world that we live in.”

Based on the intelligence firm’s analysis of Intel’s first-quarter results, iSuppli said that Intel controlled 80.2 percent of global microprocessor revenue during the period, up 4.5 percentage points from 75.7 percent in the fourth quarter of 2006.

Meanwhile, AMD lost a corresponding amount of share, with its portion of microprocessor revenue slipping to 11.1 percent in the first quarter, down 4.6 percentage points from 15.7 percent in the fourth quarter.

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